Aus Steel Pty Ltd v Marco Properties Pty Ltd

Judgment 1Before me is an application under Uniform Civil Procedure Rules 2005 (NSW) (UCPR) r 5.3(1) for preliminary discovery. That rule relevantly provides: If it appears to the court that: (a) the applicant may be entitled to make a claim for relief from the court against a person ("the prospective defendant") but, having made reasonable inquiries, is unable to obtain sufficient information to decide whether or not to commence proceedings against the prospective defendant, and (b) the prospective defendant may have or have had possession of a document or thing that can assist in determining whether or not the applicant is entitled to make such a claim for relief, and (c) inspection of such a document would assist the applicant to make the decision concerned, the court may order that the prospective defendant must give discovery to the applicant of all documents that are or have been in the person's possession and that relate to the question of whether or not the applicant is entitled to make a claim for relief. 2It is apparent from the terms of r 5.3(1) that an applicant for preliminary discovery must establish, first, that the applicant may be entitled to make a claim for relief; second, that the applicant has made reasonable enquiries to obtain the information that it seeks; and third, that the documents to which it seeks access would assist the applicant to make the decision concerned. 3Rule 5.3 is modelled on order 15A rule 6 of the former Federal Court Rules 1979 (Cth) . The rules are not identical: see Panasonic Australia Pty Ltd v Ngage Pty Ltd [2006] NSWSC 399 at [22] per Young CJ in Eq; Papaconstuntinos v Holmes à Court [2006] NSWSC 945 at [17] per Simpson J; Hornsby Shire Council v Valuer General of NSW [2008] NSWSC 1179 at [33] per Adams J. However, similar principles apply: Hatfield v TCN Channel 9 [2010] NSWCA 69; (2010) 77 NSWLR 506 at [46], [50] per McColl JA (with whom Young JA and Sackville AJA agreed). 4In particular, the question whether the applicant may be entitled to make a claim is to be determined objectively: St George Bank Ltd v Rabo Australia Ltd [2004] FCA 1360; (2004) 211 ALR 147 at per Hely J; Glencore International AG v Selwyn Mines Ltd [2005] FCA 801; (2005) 223 ALR 238 at [10] per Lindgren J. Something more than an assertion of suspicion or conjecture is required. The evidence must be sufficient to result in an objective belief in the probability of the plaintiff having the putative claim: St George Bank Ltd v Rabo Australia Ltd at ; Panasonic Australia Pty Ltd v Ngage Pty Ltd at [20], [27]; Hatfield v TCN Channel 9 at [49] per McColl JA; Noble Earth Technologies Pty Ltd v Hampic Pty Ltd t/a Cyndan Chemicals [2012] NSWSC 935 at [42]ff per Hallen AsJ. 5If the court is satisfied that the relevant conditions exist, it has a discretion whether or not to order preliminary discovery. One of the matters that the court will take into account in exercising that discretion is whether the application is genuinely brought in order to obtain the information that is sought for the purpose of determining whether the applicant is entitled to make a claim or whether it is brought for a collateral purpose. 6It is apparent from the evidence filed by the plaintiff that it acquired a number of roll form machines from the first defendant, Marco Properties. The plaintiff alleges that those machines are defective in various respects and that it has suffered loss as a consequence. It has filed extensive evidence in support of the present application from which it can be inferred that the plaintiff has at least an arguable case that that is so. 7The plaintiff does not seek preliminary discovery in relation to that claim. Rather, the plaintiff seeks to make a claim that Marco Properties has sought to alienate its property with the intent to defeat the plaintiff's claim and the plaintiff claims that it is entitled, either under s 228 of the Property Law Act 1974 (Qld) or s 37A of the Conveyancing Act 1919 (NSW), to set aside the transaction by which it is said Marco Properties has alienated its property. 8The relevant transaction occurred as a result of an agreement dated 23 August 2013 entered into between Marco Properties and its parent company, Marco Group Holdings Pty LTd, and a company known as Evolve Group Pty Limited. Essentially, that agreement involved a merger of the businesses previously carried on by Marco Properties and Evolve Group. Under the terms of the agreement, a new company known as Marco Engineering was established. Marco Properties transferred many, but not all, of its assets to that new company and that new company issued shares to Marco Group and Evolve Group. 9The plaintiff claims that as a result of that transaction it may be entitled to make a claim for relief under the Queensland or New South Wales legislation. In order to make out that claim, the plaintiff must establish, first, that the defendant has alienated its property and, second, that it has done so with the intent to defraud creditors. 10The plaintiff submits that the existence of the intention to defraud creditors may be inferred from evidence that suggests that the property transferred by Marco Properties to Marco Engineering was transferred at an undervalue and that the evidence available to it is sufficient to establish that it may be entitled to make a claim for relief. It submits, however, that it still does not have sufficient information in order to determine whether to seek that relief. 11Although at the time the plaintiff made its original application it maintained that it required various information in order to make a decision, it became apparent during the course of oral submissions that the information the plaintiff says that it needs is information concerning the transfer by Marco Properties to Marco Engineering of plant and equipment. 12In particular, it is apparent from a draft outline of a statement of claim that the plaintiff proposes to file that it seeks to assert that Marco Properties transferred to Marco Engineering its plant and equipment for an amount that was $426,000 less than its true value. It is apparent that the plaintiff will seek to assert in the proceedings that it can be inferred from that fact, together with a number of other facts, that the transaction was entered with the intention of defeating the plaintiff's claim for damages in respect of the allegedly defective roll form machines. 13In my opinion, the plaintiff has not made good its claim for preliminary discovery. I say that for three broad reasons. 14First, I am not satisfied that the plaintiff has established that it may be entitled to make a claim for relief under either the Queensland or New South Wales legislation because I am not satisfied that it has established that there is a reasonably arguable case that the transaction about which it complains occurred for the purpose of Marco Properties defeating its creditors. 15On the face of the relevant contract, the transaction was an ordinary commercial transaction. It was one by which the businesses of two previously separate entities were merged. If the plaintiff's contention is correct, Marco Group transferred assets in which it had a 100 percent interest to an entity in which it only had a 50 percent interest at an undervalue and in doing so conferred a benefit on the Evolve Group. It is conceivable that parties may enter into a transaction of that type where the two entities are not at arm's length or where some other transaction between them explains the apparent gift. There is no evidence at all before me, however, which would suggest that that is this case. 16It is also apparent from the material before me that the transaction with Evolve Group was entered into before any demand was made by the plaintiff. The transaction is a reasonably complicated one. It appears to have been carefully documented and it can be inferred from those facts that the transaction must have been contemplated some time before the agreement itself was signed. 17Mr Jacobs, who appears for the plaintiff, submitted that, although the transaction was entered into before his client served a formal letter of demand, it was apparent from correspondence between the parties that his client had already expressed considerable concern about problems it was having with the roll form machines and it can be inferred from those complaints that Marco Properties must have expected or anticipated a claim well before the letter of demand. 18The plaintiff also relies on evidence given by Mr Onley, a director and shareholder of the plaintiff, who deposes that on 18 March 2013 in the boardroom at Marco Properties' factory, Mr Tonks, a director of Marco Properties, said to him words to the effect: These machines cannot roll 1.6mm steel. If you insist on this then I may as well shut up shop and then nobody will get anything. Mr Jacobs submits that Mr Tonks must have been understood as saying something to the effect that if a claim was brought nobody would get anything. 19I do not accept either of these submissions. Although it is true that the plaintiff had raised a number of issues with the machines sold to it, I do not think that those complaints could reasonably have been understood by Marco Properties to be the forerunner of proceedings against it. Understood in their context, it seems to me they were complaints about defects in the machines which the plaintiff expected to be fixed. 20The evidence given by Mr Onley does not explain the precise context in which the statement I have quoted was made. It is equally consistent with the overall context that what Mr Tonks was saying was that, if the plaintiff wanted machines that could roll 1.6mm steel, then Marco Properties was not in a position to supply those machines. 21A further difficulty with the potential claim is that the principal evidence relied on by the plaintiff to establish that it may have a claim in the sense required by UCPR r 5.3 is an expert report prepared by Mr Matthew Gwynne. It is apparent, for example, that the plaintiff relies on that expert report for the allegation it expects to be able to make, subject to further enquiries, that the machine and equipment were sold by Marco Properties to Marco Engineering for approximately $426,000 less than their value. 22However, it is apparent on a proper reading of the report that that is not what the report says. The issue on which Mr Gwynne was asked to express an opinion was the following: On the documents provided are you able to say whether the effect of the Transaction (as defined in paragraph 2.3.2 below) was that Marco Properties Pty Limited ("Properties") alienated assets such that its net assets diminished below $2.3M? ... 23The sum of $2.3 million is the amount that the plaintiff has indicated it intends to claim against Marco Properties for the defective machines, including interest and costs. Mr Gwynne's report does not address the question whether assets were sold at an undervalue. In para 4.5.5 of his report, Mr Gwynne does observe that the directors' valuation of plant and equipment, on which presumably the sales transaction was based, was less than the book value as disclosed in the 31 January 2013 balance sheet of Marco Properties by an amount of $426,000. But that itself does not give rise to a reasonable belief that the plant and equipment were transferred at an undervalue. There could be any number of reasons for why the book value of plant and equipment at one date was substantially more than the true value of that plant and equipment at another. 24The final reason why I am not satisfied that the plaintiff may be entitled to make a claim for relief under either the Queensland or New South Wales legislation is that Marco Properties has retained some assets, including real estate, and it announced the transaction with Evolve Group publicly. That conduct is very difficult to reconcile with any suggestion that Marco Properties was intending to defeat its creditors by the transaction with Evolve Group. 25The second reason why I am not prepared to order preliminary discovery in this case is that, as I have said, it emerged during the course of oral submissions that the principal matter of concern to the plaintiff was the transfer of plant and equipment at an undervalue. The only matter it appears the plaintiff now seeks to investigate is the question whether that allegation can be made good. 26Mr Jacobs submitted that that question needed to be investigated because the evidence was unclear about whether the equipment had actually been sold. He pointed to evidence from Marco Properties' solicitors suggesting that it had. On the other hand, he submitted that the agreement itself suggested that it had not. The relevant clause of the agreement is cl 1.6, which relevantly provides: Issue of Initial Shares The Initial Shareholders agree to subscribe for and [Marco Engineering] agrees to issue the Initial Shares, free from Encumbrances, in consideration of the following contributions made or to be made to [Marco Engineering] by each of the Initial Shareholders by the Mobilisation Date as follows: (a) [Marco Group] must provide the following contributions to [Marco Engineering]: (i) Procure Marco Properties to provide the following contributions to [Marco Engineering]: A. Plant and equipment assets owned, leased or licensed by Marco Properties at the date of this Agreement, but which the parties agree [Marco Engineering] will lease for three months from the date of this Agreement or such other period agreed in writing by the parties. B. ... In my opinion, it is clear that the effect of this clause is that the plant and equipment owned, leased or licensed by Marco Properties at the date of the agreement was transferred to Marco Engineering. The parties also agreed that it should be leased to Marco Engineering from the date of the agreement - that is, before settlement. No investigation needs to be undertaken to determine whether the plant and equipment was transferred. 27The plaintiff also submits that it needs to investigate whether the plant and equipment was transferred at an under value. However, in my opinion, the categories of documents sought by the plaintiff would largely provide no assistance to the plaintiff in investigating that question. Mr Jacobs was willing to concede that point in relation to a number of the categories. However, he maintained that categories 2 and 6 were still relevant. Those categories are in the following terms: 2) All audited and unaudited accounts and financial statements (including management accounts) for each of Marco Properties Pty Ltd (ACN 010 710 844) (Marco Properties) and Marco Engineering prepared from 4 March 2013 to date, including financial statements for the year ending 30 June 2013, for the six months ending 31 December 2013 and as at 1 January 2014. ... 6) All asset registers and/or inventories of plant, machinery, vehicles or other equipment held by each of Marco Properties and Marco Engineering created in the last three years, including as at 31 December 2013 and 1 January 2014. 28As to category 2, I find it difficult to see how that category of documents would advance the plaintiff's consideration of whether the plant and equipment were sold at an undervalue. It is possible that a more limited version of category 6 would permit the plaintiff to identify precisely the assets that had been transferred. However, it seems to me that that information alone would be of very little assistance in determining whether the transfer occurred at an undervalue. For that reason, I would not be prepared to require Marco Properties and Marco Engineering to give preliminary discovery of that category. 29The third reason why I am not prepared to order preliminary discovery is a discretionary one. It is apparent from the instructions given to Mr Gwynne and also from the affidavit of Miss Reye, the solicitor for the plaintiff, together with some of the things that Mr Jacobs said in submissions, that the principal reason for this application was to obtain information concerning the value of Marco Properties' remaining assets for the purpose of determining whether it would be able to meet any judgment that the plaintiff obtained on its principal claim. 30Mr Jacobs properly conceded in oral submissions that that was not a proper purpose: see Glencore International AG v Selwyn Mines Ltd at [12]. Given that, in the exercise of my discretion, I would not be prepared to order preliminary discovery, even if the plaintiff were otherwise entitled to it. 31Mr Giles, who appeared for the defendants submitted that, since the application was made for an improper purpose, the plaintiff should pay the defendants' costs on an indemnity basis. After some hesitation, I have concluded that it should not. Although the pursuit of the claim was ultimately misconceived, I am satisfied that the transaction between Marco Group and the Evolve Group was one that the plaintiff was entitled to investigate. 32The summons should be dismissed with costs.